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Genomic Health Beats Estimates

Genomic Health (GHDX) reported earnings per share (“EPS”) of 3 cents in the first quarter of fiscal 2012, better than loss per share of a cent in the year-ago period and the Zacks Consensus Estimate of a loss of 3 cents per share.

Total revenue in the reported quarter climbed 17% year over year to $58.5 million, ahead of the Zacks Consensus Estimate of $56 million. Product revenues (primarily from the Oncotype DX breast cancer test) climbed approximately 17% to $57.9 million in the quarter while Contract revenues accounted for the balance. In the reported quarter, Genomic provided more than 18,630 Oncotype DX test results as against 16,230 in the comparable period of 2011, representing a growth of 15%.

Genomic Health’s improved performance, to some extent, benefited from payments by Medicare for colon tests. However, the company continues to expect net loss in the second quarter due to seasonal patterns impacting test volumes and revenues along with planned increases in operating expenses.

Gross profit increased 20.6% year over year to $49.14 million coupled with a 220 basis point improvement in gross margin to $871 million. Despite the 17.8% rise in operating expenses to $48.3 million, Genomic Health reported operating income of $871 million during the reported quarter compared to an operating loss of $232 million in the year-ago period. The rise in operating expenses was based on higher research and development (18.2% to $11.9 million), selling and marketing (18.6% to $24.4 million) and general and administrative (15.6% to $11.9 million) expenses.

Genomic Health did not provide any update regarding its outlook for fiscal 2012. As per the guidance provided along with fiscal 2011 results, the company expects to report revenues of $230−$240 million and tests numbering 75,000-77,000. Moreover, the net income guidance of $5–$8 million is before an incremental loss of up to $8 million for the new subsidiary.

Focus on NGS

In 2012, Genomic Health established a wholly-owned domestic subsidiary, InVitae Corporation, to provide clinically relevant genetic information to physicians and patients from 2013. Although loss incurred by the subsidiary was insignificant during the quarter, the company still expects a net loss of $8 million in the full year.

The company also entered into a strategic alliance with OncoMed Pharmaceuticals to use next generation sequencing (“NGS”) to identify biomarkers that can aid the development of the latter’s antibody cancer therapeutics.

Recommendation

At present, Genomic Health is highly dependent on the success of the Oncotype DX breast cancer test. Recent achievements made by the company in this regard include the launch of Oncotype DX DCIS Score to patients in New York and some development on the reimbursement front for the node-positive breast cancer patients. The company also established distribution agreements to provide Oncotype DX in Mexico and Russia. Securing public reimbursement contract with hospitals in UK’s two regions along with reimbursement in Spain through a public payor contract with the Madrid Regional Authority is encouraging.

Meanwhile, the colon cancer test, launched in January 2010, is yet to make a significant contribution to the top line. However, the situation could improve gradually as the company tries to get reimbursement for this test, which should lead to increased adoption.

However, the several studies that would expand Genomic Health’s portfolio are still in their initial stages. Though encouraged by the company’s decision to form a subsidiary solely focused on genetic sequencing, we also see a lot of activity in the market targeting this specified niche. Life Technologies (LIFE) and Illumina (ILMN) are significant players in this business. The strategic alliance with OncoMed is also a significant step in the goal toward strengthening its foothold in the NGS space. These developmental steps will involve higher expenses, which in turn will adversely affect the bottom line.

For the long term, we have a Neutral rating on Genomic Health. The stock retains a Zacks # 3 Rank (“Hold”) in the short term.